Paytm Payments Bank pinch: Can Vijay Shekhar Sharma get the house back in order?

Paytm Founder and Chief Executive Officer Vijay Shekhar Sharma. Image: Tomohiro Ohsumi/Getty Images

It is fire at too many places that founder and CEO Vijay Shekhar Sharma will have to douse, to get the house back in order. The Reserve Bank of India’s (RBI) restrictions order on Paytm Payments Bank, an associate entity of One 97 Communications, will have severe implications on its valuations and profitability.
 
On January 31, the RBI directed Paytm Payments Bank to stop any further deposits, credit transactions, top-ups in any customer accounts, prepaid instruments, wallets, FASTags from February 29, other than any interest, cashbacks which may be credited anytime. Customers will only be allowed to withdraw their balances from their accounts or other prepaid instruments.
 
“For all practical purposes, the notifications end operations of Paytm Payments Bank. This is a definite negative development and adds to the already heavy regulatory overhang on the business,” says Pranav Gundlapalle, analyst, Bernstein.
 
Earlier in March 2022, the RBI had banned Paytm Payments Bank from onboarding new customers due to material supervisory concerns observed, until it was able to complete its comprehensive IT audit (Comprehensive System Audit). Following the audit, external auditors have revealed persistent non-compliance and continued material supervisory concerns that warranted further supervisory action.
 
“Overall, this development highlights the regulatory overhang that surrounds the Paytm model which in our view is the biggest risk for this business. And clearly Paytm is far from becoming a stable format,” adds Gundlapalle.
 
The company’s payment aggregator licence is still pending approval while most of their peers have received the licence.
 
Meanwhile, the RBI also directed that the Nodal Accounts of One97 Communications Ltd and Paytm Payments Services will be terminated by February 29.

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However, the company said this does not impact user deposits in their savings accounts, Wallets, FASTags, and National Common Mobility Cards (NCMC) accounts, where they can continue to use the existing balances.
 
In a statement to the stock exchanges, One97 Communications said that as a payments company, it works with various banks, not just Paytm Payments Bank. The company is now planning to accelerate plans and completely move to other bank partners.
 
Its other financial services such as loan distribution, insurance distribution and equity broking are not in any way related to Paytm Payments Bank Limited and are expected to be unaffected by the RBI directive.
 
The bigger issue is Paytm has not been in the good books of the regulator and going forward, their lending partners also could possibly relook at the relationships in our view, say Suresh Ganapathy and Punit Bahlani, analysts, Macquarie.
 
According to them, the RBI is indirectly revoking the PPI (pre-paid instrument) licence of Paytm. “The RBI has conducted a comprehensive IT audit and continued to identify non-compliance, which in our view indicates that these lapses are quite material. Accordingly, we do not see any near-term solution to these problems and this effectively means, in our view, that the RBI is indirectly revoking the PPI (pre-paid instrument) licence of Paytm.”

Governance issues, turning too costly now

As per its own estimates, the company expects the RBI action to have a worst-case impact of Rs300 to 500 crore on its annual Ebitda going forward.
 
According to Jayant Kharote and Prakhar Sharma of Jefferies, the key impact could be on the lending business if lending partners limit business due to operational and governance risks. Its lending business contributes 20 percent of its revenues.

Also read: Paytm to generate free cash flow by year end, says CEO Vijay Shekhar Sharma
 
Also, wallet GMV (gross merchandise value) which is 5 percent of the total may need to be wound down. Paytm is the third largest player with 5.8 crore customers with a market share of 17 percent. Merchants using Paytm Bank (6 percent of devices) may be impacted while FASTag GMV will be majorly affected, Kharote and Sharma feel.
 
Given the severe restrictions imposed on Paytm Payments Bank, Ganapathy and Bahlani believe it significantly hampers Paytm's ability to retain customers in its ecosystem, and accordingly restricts it from selling payment products and loan products. “We think revenue and profitability implications in the medium- to long-term could be significant and remain a key item to monitor,” they add.
 
Separately, in response to market rumours, founder Sharma has reconfirmed to the stock exchanged that he has not taken any margin loans, or otherwise pledged any shares that are directly or indirectly owned by him.
 
“We would take this opportunity to clarify that as per banking regulations, Paytm Payments Bank Limited is run independently by its management and board. While OCL is allowed to have two board seats on the board of Paytm Payments Bank Limited, as a part of its shareholder agreement, OCL exerts no influence on the operations of Paytm Payments Bank Limited, other than as a minority board member, and minority shareholder,” the statement to the BSE said.

Stock crashes

Since its listing, shares of One97 Communications have been of a roller-coaster ride. Following the RBI ban, the stock has hit 20 percent lower circuit on two consecutive days, tanking nearly 80 percent from its issue price of Rs 2,150.

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The initial public offering (IPO) of Paytm worth Rs18,300 crore had priced its issue at Rs2,150 apiece. The issue, subscribed 1.89 times, was a mix of offer-for-sale (OFS) and fresh issuance of shares. The shares made their stock markets debut on November 18, 2021.
 
Vijay Shekhar Sharma holds 9.11 percent in One97 Communications while retail investors’ stake is 12.85 percent, as per the latest shareholding data till December available on the BSE. Domestic institutional investors like Nippon Mutual Funds, Mirae Mutual Funds, Alternative Investment Funds hold a cumulative 6.06 percent. Foreign institutional investors (FIIs), including FDI, hold 63.72 percent in One97 Communications.
 
Paytm has recently announced its plan to downsize its BNPL (buy-now-pay-later) operations and was working to mitigate the impact by scaling up higher-ticket personal and merchant loans. Against this backdrop, the latest measures raise serious concerns over its business outlook and dent overall investor confidence, say analysts at brokerage firm Motilal Oswal Financial Services.
 
“We, thus, remain watchful of Paytm’s business model and its ability to navigate through this highly uncertain regulatory and macro environment. We are awaiting clarity from the company on the business outlook,” the brokerage firm said downgrading its rating to neutral.